The Perverse Paradox in Mexico’s “Model” Economy

Aberration or design feature?

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

With Brazil, Latin America’s largest economy, mired in its deepest recession for years, with Venezuela perpetually poised on the edge of the abyss, and with Argentina facing a treacherous period of political and economic transition, Mexico is once again drawing the attention of international investors.

The economy could grow as much as 3.5% in 2015, predicts Mexico’s fifth largest bank, Banorte. The OECD expects it to expand by at least 3%.

A Model Economy

In recent years, glowing economic forecasts have become a New Year formality for Mexico. Economists representing international banks and supranational institutions like the OECD and the IMF confidently predict record-breaking annual growth for the year to come, only to spend the rest of the year frantically downgrading their predictions until, by November or December, they’re more or less spot on.

That’s not to say that Mexico’s economy doesn’t have important points in its favor, especially at the macro level. Unlike Brazil and many other Latin American economies, Mexico is not heavily dependent on Chinese demand for its commodities, although the economy has been hit hard by cascading oil prices. And although the peso depreciated by 17% last year, the official inflation rate is still comfortably below the 2% line — compared to over 10% in Brazil. Meanwhile, things are so bad in Argentina that the National Institute of Statistics has stopped publishing official inflation figures altogether. As for Venezuela, the less said the better.

Further north, foreign direct investment continues to pour into Mexico. As the country’s president Enrique Peña Nieto recently boasted, in the first three years of his administration, average annual foreign direct investment was around $31 billion dollars, compared to just $24 billion from 2001 to 2012.

It’s not just the president singing Mexico’s praises. In the latest edition of the World Bank’s Doing Business report – the global benchmark of investment standards – Mexico rose 14 places in the business and investment conditions category, from 53rd to 39th, making it the best placed Latin American country. According to Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20, Mexico has also outperformed all other OECD economies at applying the institution’s recommendations on regulatory issues.

A Dubious Distinction

In other words, Mexico’s economy is on the path to becoming a model economy — according to many of the world’s most powerful economic institutions. Which begs one question: how is it possible that poverty is more rampant than at any other point this century? Is it an aberration or merely a design feature?

Despite – or perhaps because of – the government’s highly praised economic reforms, including the creation of two ambitious poverty reduction programs, the number of Mexicans living in poverty increased by 2 million over the last three years. According to the National Council for the Evaluation of Social Development Policy (CONEVAL for its Spanish acronym), the main factor in this increase was household income levels, which fell by 3.5% between 2012 and 2014.

This trend seems set to worsen as salaries for Mexico’s poorest continue to decline. According to a study by the National Autonomous University of Mexico (UNAM), over the last three years, real salaries in Mexico – already among the lowest in Latin America and by far the lowest of OECD economies – lost 9.65% of their purchasing power. This trend has been fuelled as much by rising food prices as by dwindling salaries. Between 2005 and 2014, the price of food in Mexico increased on average by 23.3%, the highest level of any OECD nation. The OECD average was just 8%.

Measured on the basis of income levels alone, the percentage of people living in absolute poverty in Mexico — now a staggering 53.2% — is one percentage point higher today than it was in 1992, giving Mexico the rather dubious honor of being the only Latin American country to have registered a regressive tendency on poverty reduction, according to the OECD.

Tax-Free Living

At the other end of the spectrum, things have never been better. Both the relative and absolute wealth of Mexico’s super rich exceeds, by a long shot, the fortunes of the super rich of most other nations. In 2014, Mexico’s 16 billionaires boasted a combined wealth of $144 billion, equivalent to 11.4% of Mexico’s GDP of $1.26 trillion [Slimlandia: Mexico in the Grip of Oligarchs].

The amount Mexico’s superrich pay in income or wealth tax is derisory, if indeed they pay anything at all. Most have their funds stashed in a tax jurisdictions far, far away, leaving Mexico’s middle classes to pick up the tab. “We have a system that does not tax the rich,” says economist Julio Boltvinik. “The government doesn’t use public spending to stimulate job creation while employing a monetary and exchange rate policy that acts as a brake on economic activity.”

If anything, conditions seem set to get worse for Mexico’s poor and middle classes, as Peña Nieto’s government applies austerity measures in a desperate – and likely forlorn – bid to plug the growing public deficits that it itself helped create.

As WOLF STREET warned in July, Mexico will soon have to learn to live without its fiscal sugar daddy, Petroleos Mexicans (A.K.A. PEMEX), a direct consequence of the government’s much-praised energy reforms. For decades the nationalized company provided a huge chunk — recently as much as one-third — of Mexico’s government revenues. In 2015, its contribution plunged 37%, partly due to crumbling oil prices and PEMEX’s lower production, but also because of the company’s new status as a largely privatized entity having to fight for scraps in a highly competitive, buyer’s market.

To try to plug the fiscal shortfall, the government increased taxes across the board last year, including sharp hikes in the value-added tax (VAT), the most regressive form of tax. It also launched a “special tax” on production and services. In the end the extra revenues it raised from higher taxes were dwarfed by the funds it did not receive from PEMEX. In other words, a new round of austerity — including further tax hikes and reduced public spending, including on poverty-reduction programs — may soon be in order.

Meanwhile, corruption – the ultimate enemy of economic development – reaches from the highest levels of government, business and finance to the lowest levels of public service. Nothing is ever done to tackle it. Nonetheless, investors will continue to flock to the country and economists will continue to praise its government’s reformist ways. Untold billions will pour in and untold billions will pour out, while poverty continues to grow, in the model economy. By Don Quijones, Raging Bull-Shit.

After false promises, rampant speculation, and furious denials, Mexico’s biggest construction company, ICA, admitted it will default on $700 million of dollar bonds. ICA is among a number of Mexican corporations that have borrowed in dollars and are now getting hit by a strengthening dollar and rising U.S. interest rates. Read…  Dollar-Debt Blows up in Mexico, Pushes Biggest Construction Firm toward Abyss

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  10 comments for “The Perverse Paradox in Mexico’s “Model” Economy

  1. Yoshua says:

    A world for the rich elite connected to global financial institutions and the rest living in poverty, unable to afford families or to consume natural resources, might be the solution for over-population and environmental damage ?

  2. chris Hauser says:

    i was worried whether they’ll be able to pay for the great wall of trump, but if we tax mexican remittances (and throw in honduran, guatemalan, salvadoran etc — they all came through mexico anyway) — the people there will be poorer, so they’ll be cheaper wall builders and they certainly won’t need concrete for building their own homes, so the price of concrete will drop, and add in dumped chinese rebar, and presto digitato, it all works. and the wall will shade the shantytowns, saving energy, and we could mount elon’s solar panels on the wall, and and and……

    but i’m of a sunnier disposition, and think about the poor in mexico etc with dismay, they didn’t ask for it.

    try and buy a nine yard load of concrete down there, you’ll see what i mean.

    • Petunia says:

      You should take a look at the mausoleums the drug dealers build for each other. It may be the most expensive construction going on in most towns.

  3. Bobster says:

    A few years ago one of the big accounting firms ranked Mexico as the most corrupt country in Latin America. Some states are relatively un-corrupt however, like Queretaro. Mexican newspapers detail a great many incidents of corruption that just don’t exist elsewhere- phantom schools, outgoing municipal governments stealing all city vehicles and furnishings, etc.

  4. Bobster says:

    The daily minimum wage in Mexico is under US$4 at current exchange rates. A decent average wage in private business in much of the country is under $25 a day. It’s cheap to live, but still…

  5. OutLookingIn says:

    Global oil and gas exports have fallen to 1958 levels. The direct job losses have been significant, with much more to come. The ancillary job loss (pipe, drill bit, heavy equipment, steel, sundry services, etc.) is large and is growing larger by the day.

    The entire global multiplier of the down turn in the oil and gas sector is huge. The amount of world revenue taken out of the system, when adding in the collapse of all commodities knock on effect, is 10 to 15 trillion dollars. The direct effect has been the collapse in exports and imports, bringing global trade to almost a standstill.

    Excess speculation in the oil and gas sectors by use of leverage, eventually will have to be paid for. This is going to require a very large amount of debt to be written off. Not so much the above ground banking system, but the shadow banking system. Consisting in particular of the private equity sector, will suffer the greatest amount of financial pain. The uber rich become less so!

  6. Felix_47 says:

    To a large degree our economic decline has been simply because we have imported the Mexican model and a lot of the population to the US. Although we imported the poor people we did not import the resources. Mexico is our demographic future. The smartest thing we could do is integrate Mexico into the US and make it a new state and then introduce the rule of law, bad as it has become in the US. We would simply be accelerating the inevitable to the benefit of both sides. Even just eliminating border controls would help…..because all of a sudden wealthy farmers in Mexico would either pay the going wage rate in Ca to pick or watch their tomatoes rot. Unions as weak as they are could start to organize and improve the wages in our auto factories… Mexico. Now the US citizens are being taxed to support Mexico’s poorest with no benefits and no representation.

  7. cogi says:

    God Help if Mexico is made a state of USA it will be in as sad shape as YOU AMERICANS have allowed your GOVERNMENT TO MAKE IT AS IT IS NOW What is your national debt ?
    How much more will your Gov. borrow for wars to try to make peace in other countries OH its to stop the terrorists
    Like Pres. Bush was trying to protect USA from what , and how many young men lost their lives and how many service men are still paying the after effects
    Mexico is doing just fine without help from USA and there are a bout one million Americans and Canadians living full time in Mexico

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